The Real Cost of College

Despite spiraling tuition, government subsidies for higher education are—contrary to popular belief—at an all-time high.

Mark Wallheiser / AP

Claims that college tuition in the U.S. has risen because of reductions in legislative subsidies for higher education are at best gross oversimplifications—an argument I made in a New York Times piece published last month. I noted that, although tuition at public colleges and universities has nearly quadrupled since 1980 in real terms (and tripled at private ones), total state appropriations have also risen dramatically.

It’s true that, at the state level, the 48 percent inflation-adjusted increase in legislative spending over the past 35 years hasn’t kept pace with the roughly 60 percent increase in enrollment in public institutions of higher learning. (Interestingly, because of the demographics of the baby boom, the number of adults between the ages of 18 and 23 in America today is almost equivalent to that in 1980, so the recent college-enrollment explosion has very little to do with overall population growth.)

First off, whether the government should subsidize an ever-larger percentage of the population attending college is—and ought to be—controversial. Thus, treating the reported declines in per-student subsidies as inherently bad is, in regard to that issue, question-begging.

My focus here, however, is on a more fundamental point: State appropriations are just part of the subsidization picture. Indeed, my calculations show that when considering government support for American higher education as a whole, subsidies for colleges and universities are—even on a per-student basis and despite the enrollment explosion—greater than ever before. In particular, per-capita government subsidies are far higher now than they were 35 years ago, when tuition was drastically lower.

With the help of Jack Millman, a New York University law student specializing in tax policy and a certified public accountant, I’ve analyzed federal subsidies for higher education in every year from 1980 to the present. What follows are my findings:

The federal government is currently spending approximately $80 billion per year on subsidies for higher education—a figure that almost exactly matches the combined higher-ed spending of the 50 legislatures. These subsidies can be broken up into three basic categories: direct subsidies, tax credits, and tax breaks. (The fiscal figures cited in this analysis are adjusted for inflation in 2014 dollars.)

The most important of the direct subsidies are Pell grants, which are earmarked for low-income students. This year, the government is distributing approximately $35 billion in Pell money. The Pell grant program has expanded rapidly, more than tripling in size since 2000. It’s by far the best-known source of federal subsidies to colleges and universities.

What’s far less known outside of higher-ed circles is the remarkable extent to which the federal tax code has been amended in ways that benefit colleges and universities. According to the congressional Joint Committee on Taxation’s most recent estimates of federal tax expenditures, the IRS is currently redistributing approximately $45.7 billion annually in tax revenue in ways that directly and indirectly support American higher education. (This represents a 675 percent increase in such spending since 1990.) These subsidies can come in the form of tax credits or other types of favorable tax treatment—excluding certain forms of income from taxation or creating special deductions, for example.

The policy dynamics driving these increases are fairly straightforward: Democrats generally like to subsidize public goods such as education, and Republicans typically like tax cuts. (A number of GOP politicians have also started to champion the for-profit college industry.) Tax credits and deductions for higher education enable Congress to simultaneously pursue both of these policy preferences.

Tax credits reduce the amount of income tax an individual has to pay. Currently, taxpayers (and schools) benefit from two major programs: the Lifetime Learning Credit and the American Opportunity Credit. The former allows a taxpayer to receive a credit of up to $2,000 for qualifying higher-education expenses if the person meets a few other qualifications. The latter is a slightly more generous version of the Lifetime Learning Credit that can only be claimed for college expenses for the first four years of a student’s postsecondary education. The maximum amount taxpayers can claim via the American Opportunity Credit on their 2014 return is $2,500.

Here’s how the credits work: Suppose the Smiths pay their child’s tuition at State University (a hypothetical institution). If in 2014 the Smiths paid $2,000 or more in federal income tax and $10,000 or more in tuition charges, they would be eligible for a $2,500 refund via the American Opportunity Credit or $2,000 through the Lifetime Learning Credit.

These tax credits are, in effect, direct subsidies to colleges and universities: It’s as if the federal government had sent $2,500 or $2,000 to State U rather than to the Smiths because the university ends up getting the discount. Federal tax-credit programs for educational expenses, which were first introduced in 1998, have grown enormously over the last few years—from $3 billion in 2007 to $23 billion in 2014.

Meanwhile, tax deductions, exemptions, and exclusions reduce the amount of an individual’s income that’s subject to taxation by granting favorable treatment to certain education-related income or expense items. Unlike the other forms of federal support, these breaks indirectly subsidize colleges and universities. In recent years, American higher education has benefitted from an increasingly wide array of tax-break programs. They currently include, among others, the exemption for parents of students ages 18 through 23 who are enrolled in school, the student-loan interest deduction, and the deduction for charitable contributions to educational institutions. All told, these various programs now cost federal taxpayers $22.7 billion per year, according to my analysis of congressional data.

An assessment of both state and federal support for higher education reveals how much total support colleges and universities receive from government subsidies, how much has this amount has changed over time, and what these numbers look like in terms of per-student support. When doing so, it’s again useful to distinguish between direct and indirect support. Direct support—in the form of state appropriations, Pell grants, and tax credits—is money that’s funneled directly to schools. In economic terms, it’s irrelevant that some of this money passes through the hands of taxpayers on its way into college and university bursaries.

Indirect support is more complex, because its effect on the economics of higher education is more difficult to assess. For example, if I make a $1,000 donation to State U and thereby reduce what would otherwise be my tax liability by $300, this reduction may have encouraged some or all of my contribution; to the extent that it influence my donation, that $300 in tax savings could be considered a subsidy to State U. But none of it would be a subsidy if the incentive didn’t affect my decision to contribute.

Direct Government Subsidies for Higher Ed
Paul Campos

Here is how those figures translate into per-student subsidies:

Direct Subsidies per Student  
Paul Campos

The next graph includes both direct and indirect subsidies:

Total State and Federal Subsidies
Paul Campos

Here are those figures in terms of per-student subsidization:

Total State and Federal Subsidies per Student
Paul Campos

And here is the growth in average tuition over this same period:

Public and Private School Tuition Growth
Paul Campos

Whether measured in terms of both direct and indirect subsidies, or in terms of direct appropriations, grants, and tax credits, total per-student government support for higher education has increased. Yet this increase has failed to stop or even slow massive tuition increases at both public and private schools.

Recently, the Obama administration has been taking some tentative steps toward making higher-ed institutions more accountable, scrutinizing the relationship between their cost and student outcomes. But even these modest proposals have faced fierce resistance from lobbyists for colleges and universities. Over the past generation, many higher-ed institutions have become increasingly bloated and inefficient—even as they’ve relied on a growing population of poorly paid contingent faculty members and on hundreds of billions of dollars of federal student loans, only a small percentage of which are currently being repaid in a timely manner.

Meanwhile, roughly half of recent college graduates in the U.S. find themselves either unemployed or seriously underemployed. And many graduates struggle to pay educational debts that, unlike almost all other debts in American society, typically can’t be settled via bankruptcy. This is not a sustainable situation. Claiming that skyrocketing tuition has been caused by “cuts” in government subsidies only helps delay American higher education’s inevitable day of fiscal reckoning.